Business automation software provider Upland Software (NASDAQ: UPLD) missed analyst expectations in Q3 FY2021 quarter, with revenue up 2.51% year on year to $76 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $75.2 million at the midpoint, or 5.99% below analyst estimates. Upland made a GAAP loss of $11 million, improving on its loss of $11.3 million, in the same quarter last year.
Upland (UPLD) Q3 FY2021 Highlights:
- Revenue: $76 million vs analyst estimates of $77.7 million (2.13% miss)
- EPS (GAAP): -$0.36
- Revenue guidance for Q4 2021 is $75.2 million at the midpoint, below analyst estimates of $79.9 million
- Free cash flow of $4.88 million, down 53.8% from previous quarter
- Gross Margin (GAAP): 67.3%, up from 65.5% same quarter last year
Founder Jack McDonald’s second software rollup, Upland Software (NASDAQ:UPLD) is a one stop shop for sales and marketing software, project management, HR, and contact center services for small and medium sized businesses.
Businesses of all sizes are driving digital transformations as a means of increasing revenue, reducing costs, and improving productivity. Increasingly this means adopting cloud based applications across different business functions: accounting and finance, sales and marketing, legal and HR, and so on. When possible, small and medium businesses prefer to get as much functionality as possible from one provider.
Upland Software has a unique business approach. The company has grown its portfolio through dozens of acquisitions to create a broad product catalog of complementary software across seven functions: marketing, sales, contact center, project management, IT, business operations, and HR and legal. Historically, the focus has been on acquiring small software companies from venture investors who are seeking exits. Upland will then integrate the acquisitions on its UplandOne platform, which both greatly increases their profitability to Upland by removing legacy infrastructure, while also making the software easily accessible to Upland’s customer base.
Upland Software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy to use platform.
Upland Software has a wide range of competitors given its wide breadth of offering. Common rivals are Qualtrics (NASDAQ:XM), Oracle’s Netsuite (NYSE:ORCL), OpenText (NASDAQ:OTEX), Docusign (NASDAQ:DOCU), and Adobe (NASDAQ:ADBE).
As you can see below, Upland's revenue growth has been slow over the last year, growing from quarterly revenue of $74.1 million, to $76 million.
Upland's quarterly revenue was only up 2.51% year on year, which would likely disappoint many shareholders. But the revenue actually decreased by $211 thousand in Q3, compared to $2.29 million increase in Q2 2021. Shareholders might want to pay closer attention to this as the management is guiding for the decline in sales to continue in the coming quarter
Analysts covering the company are expecting the revenues to grow 6.44% over the next twelve months.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Upland's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 67.3% in Q3.
That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.
Key Takeaways from Upland's Q3 Results
We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that Upland's revenue guidance for the full year miss analyst's expectations. and the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Upland. The company currently trades at $19.45 per share.
Is Now The Time?
Upland may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Upland is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
In the end, beauty is in the eye of the beholder. While Upland wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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